Cleared for takeoff: seeking income opportunities in airport municipal bonds

Airports are a critical component of our nation’s transportation system, a source of stimulus for the economy and global trade, and one of the key areas of focus as the nation looks to address its growing infrastructure needs.

The Airports Council International-North America, a trade organization, estimates that U.S. airports’ capital needs have swelled to $20 billion per year, up from $15 billion in 2015.¹

These statistics are one reason why air travelers nowadays frequently encounter construction work at the nation’s airports, whether at parking facilities, in terminals, or on runways. The public authorities that oversee large U.S. airports are issuing bonds to finance major projects, as they recognize the need for continuous capital improvement in an environment where domestic and international air hubs compete for flights, passengers, and cargo.

While these pressing needs create financial challenges for government and the aviation industry, we believe they present unique opportunities for investors and for professionals specializing in fixed-income municipal bond strategies. Several tailwinds for airlines and the airport industry represent one of the most attractive opportunities in today’s municipal bond market, in our view.

Chart of the S&P Municipal Bond Airport Index vs. the S&P Municipal Bond Index from 2012 to 2017. The chart shows that airport bonds have outperformed the broad municipal bond market in five of the last six years.

Plenty of lift for airports in today’s economy

In seeking to identify high-quality investment opportunities in the U.S. municipal bond market, the airport projects we’re evaluating are supported by three catalysts that we expect will continue to provide positive momentum for the segment over the next few years.

  1. Air traffic growth—The recent strength of the U.S. economy and currently modest costs for aviation fuel have driven growth in both domestic and international air traffic across the United States. This growth has spurred rising activity at U.S. airports, which generate revenue from commercial carriers through landing and terminal fees as well as other sources. These positive trends are likely to put airport authorities in better position to meet their revenue projections, strengthening their ability to make bond payments and supporting the prices of underlying bonds held by investors.

  2. More revenue from ground operations—While passengers’ in-flight experience remains paramount, airports have put growing emphasis on ground amenities and concessions, from restaurants and bars to retailers. This growth has been especially strong at U.S. airports serving international travelers, many of whom are accustomed to more modern airport facilities than those in the United States. Amenities and concessions are major sources of revenue for airports, and their growth further enhances the financial position of airports and their ability to meet their debt obligations.

  3. Greater diversification of airport cost sharing—Major airlines have welcomed the expansion of amenities and concessions, as the revenue that these services generate helps make airports less reliant on airline revenue to fund their operations. That puts airports in better position to reduce their financial demands on airlines, giving commercial carriers more breathing room to potentially reduce passenger ticket fees—a development that translates to increased passenger demand, as air travel becomes more affordable.

Targeting the most attractive opportunities in airport munis

In tandem with the backlog of infrastructure improvements, these three trends point to a positive outlook for municipal bonds issued by airport authorities. However, identifying the investment opportunities with the greatest potential requires bottom-up, issue-by-issue research, as each airport project is truly unique. Funding for a project can come from a variety of sources—federal, state, local, and public/private partnerships—and the structure and complexity of each can vary dramatically. We believe a focus on large and growing airports is likely to provide the best potential to ensure that revenue projections will be sufficient to meet debt obligations to investors.

 

1 “Airport Infrastructure Needs, 2017–2021,” Airports Council International – North America, March 2017.

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Dennis DiCicco

Dennis DiCicco, 

Associate Portfolio Manager, Municipal Bonds

Manulife Investment Management

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Jeffrey N. Given, CFA

Jeffrey N. Given, CFA, 

Senior Portfolio Manager, Co-Head of U.S. Core and Core Plus Fixed Income

Manulife Investment Management

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